Gujarat High Court
Ashwin Khimchand Jhakaria vs Ddit - International Taxation-Ii on 21 April, 2014
Author: Akil Kureshi
Bench: Akil Kureshi
C/SCA/1896/2014 JUDGMENT
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
SPECIAL CIVIL APPLICATION NO. 1896 of 2014
FOR APPROVAL AND SIGNATURE:
HONOURABLE MR.JUSTICE AKIL KURESHI
and
HONOURABLE MS JUSTICE SONIA GOKANI
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1 Whether Reporters of Local Papers may be allowed to see
the judgment ?
2 To be referred to the Reporter or not ?
3 Whether their Lordships wish to see the fair copy of the
judgment ?
4 Whether this case involves a substantial question of law as
to the interpretation of the Constitution of India, 1950 or any
order made thereunder ?
5 Whether it is to be circulated to the civil judge ?
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ASHWIN KHIMCHAND JHAKARIA....Petitioner(s)
Versus
DDIT - INTERNATIONAL TAXATION-II....Respondent(s)
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Appearance:
MR TUSHAR P HEMANI, ADVOCATE for the Petitioner(s) No. 1
MS VAIBHAVI K PARIKH, ADVOCATE for the Petitioner(s) No. 1
MR NITIN K MEHTA, ADVOCATE for the Respondent(s) No. 1
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CORAM: HONOURABLE MR.JUSTICE AKIL
KURESHI
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C/SCA/1896/2014 JUDGMENT
and
HONOURABLE MS JUSTICE SONIA
GOKANI
Date : 21/22/04/2014
ORAL JUDGMENT
(PER : HONOURABLE MR.JUSTICE AKIL KURESHI)
1. Rule. Mr.Nitin Mehta, learned counsel, waives service of notice of Rule on behalf of respondent.
2. Heard learned counsel for the parties for final disposal of the petition. The petitioner has challenged a notice dated December 26, 2012 issued by the respondentAssessing Officer seeking to reopen the assessment of the petitioner for the assessment year 200708. Such notice was, thus, issued beyond the period of four years from the end of relevant assessment year. The Assessing Officer supplied reasons recorded by him for issuing notice for reopening of the assessment. Such reasons read as under :
""The assessee filed his return of income for A.Y. 200708 on 24.09.2007 showing income of Rs.46,48,050/. The return was assessed u/s.143(3) of the Act at Page 2 of 17 C/SCA/1896/2014 JUDGMENT Rs.46,48,050/ out of which income from share trading amounting to Rs.41,95,223/ was assessed as short term capital gain at special rate of Rs.10%.
On perusal of the return and assessment records, the following facts come to light :
• During the previous year relevant to A.Y. 200708 the assessee has carried out several purchase/ sale transactions of shares, mutual funds etc. throughout the year and volume involved was also substantial. Further, as per the statement of shares sold, the time gap between the purchase and sales was in days except in few cases.
• In case of income from sale of shares, mutual funds etc., the taxability of income as to whether the same is to be assessed as income from 'capital gain' or as 'income from business' depends on the volume and frequency of transactions. When there are huge number of transactions, the income has to be treated as 'income from business' and taxed accordingly. CBDT has also issued a guideline in this regard vide Circular No.4 of 2007 dt.16.06.2007 providing the circumstances where the share trading income has to be regarded as business income.Page 3 of 17
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• The shares/ mutual funds held by the
assessee were in the nature of stock in trade and not as capital assets. Therefore, the income from such transactions has to be treated as 'income from business'.
In view of the above facts, I have reason to believe that income in the case of Shri Jakhariya Ashwinkumar K. has escaped assessment for A.Y. 200708.. ..""
3. The petitioner thereupon raised his detailed objections under communication dated October 25, 2013 to the Assessing Officer's action of reopening the assessment which was previously framed after scrutiny. The petitioner contended inter alia that there was no failure on his part to disclose fully and truly all material facts for assessment. Further that the petitioner had no permanent establishment in India. He was a resident of Kenya and as per DTAA between India and Kenya, the petitioner's business income even in India cannot be taxed in India, but only in Kenya.
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4. The Assessing Officer disposed of such objections by an order dated December 26, 2013. He referred to three instances where, according to him, during assessment there was no full and true disclosures by the assessee, which read as under :
"3. So far as failure on your part in furnishing the information during the assessment proceedings is concerned, it is seen that vide notice u/s.142(1) of the Act dated 29.12.2008, you were asked to provide the details of all the share transactions with the help of bank account and DEMAT account as mentioned in point No.6. In response, vide letter dated 09.02.2009 you have submitted copy of only one share trading account with ICICI direct.com running page No.2 to 69 of the aforesaid submission. It is a well known fact that ICICI direct.com itself is a share broker. During the entire assessment proceedings, you did not furnish a copy of any Demat account with any share depository as well as trading account with any other share broker, except that with ICICI direct.com.
4. It is further seen that in your response dated 11.12.2009 to notice u/s.Page 5 of 17
C/SCA/1896/2014 JUDGMENT 142(1) dated 04.12.2009, you have clearly mentioned that you were carrying out share transactions through share broker namely Ford Brothers Capital Services Ltd., Mumbai and Bhavik Rajesh Khandhar Share and Stock Brokers Pvt. Ltd., Jamnagar. Perusal of the records shows that you never produce copy of trading account with aforesaid two share brokers, which was called for vide notice u/s.142(1) of the Act dated 29.12.2008 as per point No.16.
5. Moreover, it is also seen that the transactions mentioned in the Journal are not found to be recorded in the only share trading account provided by you, that is with ICICI direct.com. For example, there are share transactions as per voucher No.96 of your Journal dated 31.03.2007, but the same are not found recorded in the only share trading account furnished by you. All the above facts clearly show that you failed in producing the full and correct facts, details during the assessment proceedings in respect of your share transactions, though the same were specifically called for during the assessment proceedings."
5. Significantly, however, the Assessing Officer did not deal with the petitioner's contention that as Page 6 of 17 C/SCA/1896/2014 JUDGMENT per DTAA between India and Kenya, the petitioner's business income cannot be taxed in India. Be that as it may, the petitioner at that stage filed present petition and challenged the very notice issued by the Assessing Officer for reopening the assessment.
6. Drawing our attention to the documents on record and the reasons recorded by the Assessing Officer, the learned counsel Shri Himani for the petitioner contended that :
(i) There was no failure on the part of the petitioner to disclose fully and truly all material facts necessary for the assessment.
During the course of original scrutiny assessment, the Assessing Officer had raised number of queries with respect to the petitioner's share transactions. The petitioner had given detailed replies and produced voluminous documents. Only after being satisfied about the nature of transactions, the Assessing Officer passed the order of assessment on December 16, 2009, accepting the Page 7 of 17 C/SCA/1896/2014 JUDGMENT assessee's stand that the income from sale of shares was capital gain and not business income.
(ii) Any attempt on the part of the Assessing Officer at this stage now to tax the said income as business income would be mere change of opinion.
(iii) In the reasons recorded, there is no allegation that any income chargeable to tax had escaped assessment due to the failure on the part of the assessee to disclose fully and truly all the material facts. The reasons, in fact, demonstrate that the Assessing Officer has formed such a belief from the material on record itself.
7. On the other hand, the learned counsel Shri Nitin Mehta for the Revenue opposed the petition contending that :
(i) In response to the queries raised by the Assessing Officer during the assessment, the assessee gave replies, which were not fully Page 8 of 17 C/SCA/1896/2014 JUDGMENT correct. There was, thus, failure to disclose full facts.
(ii) On account of such failure on the part of the assessee, the Assessing Officer in the original assessment taxed the income as capital gain, whereas the transactions entered into by the assessee would reveal that he was engaged in the business of selling and buying shares.
(iii) The assessee had wrongly projected that he had no permanent establishment in India and that, therefore, his business income cannot be taxed in India.
8. Having thus heard the learned counsel for the parties and having perused the documents on record, we recall that the Assessing Officer in the reasons recorded has stated that "On perusal of the return and assessment records, the following facts come to light".
9. Thus, the Assessing Officer's starting point itself is the return and the assessment records, on the perusal of which he came to certain Page 9 of 17 C/SCA/1896/2014 JUDGMENT conclusions. Ordinarily, this would be sufficient to convince us that reopening beyond the period of four years from the end of relevant assessment year would not be permissible since from such reasons it cannot be gathered that there was any failure on the part of the assessee to disclose fully and truly all material facts. The Assessing Officer, however, has made an effort to demonstrate that certain material facts were not disclosed during the course of the assessment. It is his case that when the assessee was asked to supply certain details pertaining to the purchase and sale of shares, he supplied incorrect or incomplete details. We are conscious that duty of true and full disclosure would not only be confined to the return filed, but would continue even during the course of the assessment. If, therefore, in response to a pertinent query by the Assessing Officer, the assessee did not make true and full disclosure which resulted into the income chargeable to tax escaping assessment, reopening beyond the period of four years may still be permissible.
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10. However, no such grounds are mentioned in the reasons recorded by the Assessing Officer. It is held by various Courts, including the Supreme Court time and again that notice for reopening must be judged on the basis of the reasons recorded by the Assessing Officer. Through an affidavitinreply he cannot improve upon such reasons. In that view of the matter, the attempt on the part of the Assessing Officer to contend through an order disposing of objections of the petitioner and his affidavitinreply that the assessee having failed to supply full details of the sale and purchase of shares, reopening beyond the period of four years would be permissible, must fail.
11. We do not rest only on this limited aspect. We have recorded the contents of the order dated December 16, 2013 rejecting the objections of the petitioner in which the Assessing Officer had pointed out three instances of failure of true and full disclosure. In brief, they are : Page 11 of 17
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(i) The assessee was asked to provide details of all share transactions, with supporting bank accounts and demat account. In response to such question, the assessee had only submitted a copy of one share trading account with ICICI Bank and did not furnish any details of demant account with any share depository or trading account with any other share broker, except ICICI.
(ii) The assessee had stated that he was carrying out share transactions through share broker namely Ford Brothers Capital Services Ltd. and Bhavik Rajesh Khandhar Share and Stock Brokers Pvt. Ltd., but had not produced a copy of the trading account with the said two share brokers.
(iii) The transactions mentioned in the Journal are not recorded in the share trading account provided by the assessee with the ICICI.
12. Bearing in mind these allegations of non disclosure, we may peruse the queries raised by Page 12 of 17 C/SCA/1896/2014 JUDGMENT the Assessing Officer during the original assessment proceedings and the replies and documents produced by the assessee in response to such queries. Relevant portion of these questions and answers appearing in the assessee's communication dated February 09, 2009 reads as under :
3. Provide the gist of case laws and instructions, circulars which permit you not get books of accounts audited in the present state of affairs.
Section 44AB of the Income tax Act, 1961 clearly states that person who have income under head business and professional income is covered by the provision of tax audit. Assessee has transactions that are for the purposes of investment and income/loss arising there from is to be computed under the head 'Capital Gains'.
4. Provide latest circulars which speak that even after such roaring turnover of more than 8.4678 crores and alike there is no obligation on the part of the assessee to get his/her books of accounts audited. Provision of section 44AB does not apply to the assessee as he does not have any business income.
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C/SCA/1896/2014 JUDGMENT
xxx xxx xxx
6. On the facts and circumstances of the case 269 please explain all of your transactions with the help of bank a/c and DEMAT a/c. The copy of demat account and bank account is attached herewith.
xxx xxx xxx
8. Produce comparative chart in tabular form of net profit, total turnover, direct and indirect expenditure of last 4 assessment years of the incomes as per return of income so filed.
Assessee does not have any business income in India. It earns income from purchase and sale of shares held as investment in India.
xxx xxx xxx 10 Produce books of accounts of the share business of the relevant period and also bills and vouchers of the expenditures pertaining to such sources of income and relevant period.
Books of accounts for the relevant period are produced herewith.
xxx xxx xxx 16 Produce the stock register of the scrips/ 70 84 items traded by you with the cost price, tax fees, duty, cess if any levied/ palid thereon.
Assessee does not maintain any stock register. However, ledger account and Page 14 of 17 C/SCA/1896/2014 JUDGMENT bills of purchases provide the quantity details of purchases and sales of securities.
The copy of journal register is attached herewith wherein the transactions of purchase and sell of shares entered during the year under consideration are mentioned along with description of various charges like brokerage, del. buy chgs., Security charges, service tax, STT eetc.
xxx xxx xxx 22 Provide Stock positions of shares, stocks, 145 150 debentures, bonds, if any dealt by you in the year under consideration.
The details are attached herewith.
13. In addition to such materials produced by the assessee in response to various queries raised by the Assessing Officer, he had also produced a complete stock transaction summary along with the said communication dated February 09, 2009, which is at page 105 of the writ petition. The above materials produced by the petitioner either in response to the queries raised by the Assessing Officer or voluntarily, leave no manner of doubt that full details to Page 15 of 17 C/SCA/1896/2014 JUDGMENT enable the Assessing Officer to take a view whether the income of the assessee from trading of shares should be taxed as capital gain or business income, was on record. The Assessing Officer had raised multiple questions calling for documentary proof in certain cases. All these questions pertain to the assessee's declared income from sale of shares. If not strictly speaking in the sequences in which the questions were raised, nevertheless at least in the stock summary full details were laid before the Assessing Officer. If during such assessment the Assessing Officer was of the opinion that the activity carried on by the assessee was in the nature of business of buying and selling shares, he could as well have expressed such opinion in the assessment order and taxed the income accordingly. By no stretch of imagination, could it be stated that on account of failure on the part of the assessee to disclose full and true material facts, he came to erroneous conclusion and accepted the assessee's stand that the income was in the nature of capital gain. To reiterate, Page 16 of 17 C/SCA/1896/2014 JUDGMENT during the original assessment in response to various queries raised by the Assessing Officer, the assessee made full disclosures. Full facts were thus before the Assessing Officer to ascertain whether the income was in the nature of business income or capital gain. He having taken a particular view, reopening beyond the period of four years would not be permissible.
14. In the result, the impugned notice dated December 26, 2012 is quashed. The petition stands disposed of accordingly. Rule is made absolute. There shall be, however, no order as to costs.
(AKIL KURESHI, J.) (MS SONIA GOKANI, J.) Aakar Page 17 of 17